New stimulus under consideration in China would raise this year’s budget deficit and ensure the economy achieves the government’s official growth target of about 5%, though more support is likely needed to boost weak demand.
Economists and analysts have reached this conclusion after reading a Bloomberg News story that government officials are considering issuing at least 1 trillion yuan ($137 billion) in extra sovereign debt to fund infrastructure investment. The talks reflect rising anxiety among China's senior leadership over the future of the world's second-largest economy and how it stacks up against the United States.
Here is a summary of the report's reception among experts:
Oversea-Chinese Banking Corp. Ltd. economist Tommy Xie:
To me, this is a positive move in the fight against municipal debt. Chinese government debt as a percentage of GDP is comparable to that of many industrialized economies, but China's unique debt structure has its own unique issues.
A workable answer appears to be the proposal to allow the federal government to take more of the debt. This method has the potential to reduce the burden on municipal budgets, creating conditions in which resources can be better directed to promote economic expansion and boost consumer confidence.
Research head at Credit Agricole CIB, Xiaojia Zhi:
China needs to do more to demonstrate its dedication to growth stabilization and demand enhancement. Investors need not be very concerned about a moderate increase in the federal deficit. To increase government spending and improve the economy, the central bank must take on more responsibility.
This hasn't been confirmed yet, but considering that private demand is still weak and local fiscal conditions are tight due to the crisis in the property sector, I think it's a legitimate consideration. The national debt to GDP ratio is still fairly low, and the government's finances are in good shape overall. A modest amount ($1 trillion) with a positive message (0.7% of GDP).
Jones Lang LaSalle Inc. Chief Economist Bruce Pang:
Offsetting macro challenges and uncertainty, the ad hoc issuance of more debt by the central government might provide further policy support and more resources to re-engineer a stronger and faster recovery. It is possible that infrastructure investment in China will serve as the first baton to be passed, with subsequent batons carried by company capital expenditures and consumer spending.
Société Générale SA's principal macro strategist for Asia, Kiyong Seong:
The fact that they are considering issuing more bonds at this time of year is a pleasant surprise. The benefits of infrastructure investment, however, will be mitigated by the uncertainty surrounding their ultimate destination. China interest rates may face a slight upward risk, but the USD/CNY exchange rate is unlikely to suffer any significant losses.
Additional bond issuance will likely reduce future yield declines in magnitude but will come at the cost of slightly higher yields in the short term. The money would therefore be best put to use where it can have the greatest impact on restoring consumer spending.
Ding Shuang, Standard Chartered Plc's top economist for North Asia and Greater China.
If this plan had been considered three months earlier, when China had just had a setback in its post-Covid rebound in the second quarter, it might sound more realistic. With the budget still having some wiggle room and the economy showing only slight signs of growth in August and September, I ask if now is the time to introduce further fiscal stimulus.
Economist He Wei from Gavekal Dragonomics on China:
It will stimulate the economy and boost China's chances of achieving 5% GDP growth this year. Assuming the additional sovereign debt is put to good use, the fourth quarter should see respectable growth.
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